<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission File No. 0-20440
MEDICAL RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3584552
(State of Incorporation) (IRS Employer Identification No.)
125 STATE STREET, SUITE 200, HACKENSACK, NJ 07601
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: (201) 488-6230
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
At May 1, 2000, 10,064,228 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding and the aggregate market value of the
Common Stock (based upon the OTC Bulletin Board closing price of these shares on
that date) held by non-affiliates was $563,029.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
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Medical Resources, Inc.
Index
PAGES
-----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 ..................... ..................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 ................................ 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 ............................... 5
Notes to Consolidated Financial
Statements................................................... 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations... ................................ 12-19
PART II. OTHER INFORMATION............................................ 20
2
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Medical Resources, Inc.
Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents................................. $ 8,382 $ 9,360
Cash and short-term investments, restricted............... 838 600
Accounts receivable, net.................................. 48,794 50,177
Other receivables......................................... 10,523 8,579
Prepaid expenses.......................................... 3,835 3,638
----- -----
Total current assets.................................... 72,372 72,354
Property and equipment, net................................. 31,458 33,718
Goodwill and other intangible assets, net................... 110,431 112,474
Other assets................................................ 1,391 1,510
--------- ---------
Total assets............................................ $215,652 $220,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Senior notes due 2001 through 2005, classified as current.. $59,800 $75,000
Notes and mortgages payable, classified as current......... 8,819 10,999
Capital lease obligations, classified as current........... 3,712 4,901
Current portion of senior notes payable 15,200 -
Current portion of notes and mortgages payable............. 11,006 9,718
Current portion of capital lease obligations............... 7,681 7,808
Accounts payable .......................................... 9,823 11,327
34,332 28,324
Accrued expenses and other current liabilities ............ ------ ------
Total current liabilities................................ 150,373 148,077
Notes and mortgages payable, less current portion ............ 3,243 4,213
Obligations under capital leases, less current portion ....... 2,797 3,535
Other long term liabilities .................................. 772 768
-------- ----------
Total liabilities....................................... 157,185 156,593
Minority interest ........................................... 4,627 4,573
Stockholders' equity:
Common stock, $.01 par value; authorized 50,000 shares;
10,064 issued and outstanding at March 31, 2000 and 9,756
issued and outstanding at December 31, 1999............... 101 98
Series C Convertible Preferred Stock, $1,000 per share
stated value; 14 shares issued and outstanding;
liquidation preference 3% per annum...................... 15,319 15,321
Additional paid-in capital................................ 144,938 144,909
Accumulated deficit....................................... (106,518) (101,438)
--------- ---------
Total stockholders' equity.............................. 53,840 58,890
-------- ----------
Total liabilities and stockholders'equity................... $215,652 $220,056
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
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Medical Resources, Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and
1999 (in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months
ENDED MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net service revenues........................................ $ 38,463 $ 41,888
Cost of services............................................ 25,852 27,263
------ ------
Gross profit............................................. 12,611 14,625
Provision for doubtful accounts............................. 1,694 2,202
Corporate general and administrative expenses............... 3,088 2,710
Equipment leases............................................ 3,315 2,036
Depreciation and amortization............................... 4,783 5,606
Loss attributable to sale or closure of centers............. 625 -
Other unusual charges....................................... 957 280
-------- ---------
Operating income (loss)................................... (1,851) 1,791
Interest expense, net....................................... 2,672 2,805
Minority interest........................................... 457 324
-------- ---------
Loss before income taxes.................................. (4,980) (1,338)
Provision for income taxes.................................. 100 130
-------- ---------
Net loss.................................................. (5,080) (1,468)
Charges related to convertible preferred stock.............. (106) (111)
-------- ---------
Net loss applicable to common stockholders................ $(5,186) $(1,579)
======== ========
Basic and diluted net loss per common share $ (0.53) $ (0.17)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
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Medical Resources, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months
ENDED MARCH 31,
----------------------
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................... $ (5,080) $ (1,468)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.............................................................. 4,783 5,606
Provision for uncollectible accounts receivable............................................ 1,694 2,022
Other, net................................................................................. 198 326
Changes in operating assets and liabilities:
Accounts receivable........................................................................ (311) (7,014)
Other receivables.......................................................................... (1,944) (1,981)
Prepaid expenses........................................................................... (254) (193)
Other assets............................................................................... 119 274
Accounts payable and accrued expenses...................................................... 2,973 833
Other liabilities.......................................................................... 4 (109)
--------- ---------
Total adjustments........................................................................ 7,262 (236)
--------- ---------
Net cash provided by (used in) operating activities.................................. 2,182 (1,704)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net of disposals......................................... (554) (1,159)
Disposition of diagnostic imaging centers, net of cash sold.................................. 1,310 631
Other, net................................................................................... - (95)
--------- ---------
Net cash provided by (used in) investing activities...................................... 756 (623)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes and mortgages payable............................................ (1,862) (4,077)
Principal payments under capital lease obligations........................................... (2,054) (2,609)
--------- ---------
Net cash used in financing activities.................................................... (3,916) (6,686)
--------- ---------
Net decrease in cash and cash equivalents.................................................... (978) (9,013)
Cash and cash equivalents at beginning of year............................................... 9,360 20,997
--------- ---------
Cash and cash equivalents at end of period................................................... $8,382 $11,984
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for -
Cash refunded (paid for) by income taxes, net........................................... $ (50) $ 15
Cash paid for interest.................................................................. (769) (3,145)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
MEDICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Medical Resources, Inc., (herein referred to as "MRII" and collectively
with its subsidiaries, affiliated partnerships and joint ventures, referred to
herein as the "Company") specializes in the operation and management of
diagnostic imaging centers. The Company operates and manages primarily
fixed-site, free-standing outpatient diagnostic imaging centers (herein referred
to as "centers"), and provides diagnostic imaging network management services to
managed care providers. The Company also develops and markets radiology
information systems through its wholly-owned subsidiary, Dalcon Technologies,
Inc.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q, and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for interim periods are not
necessarily indicative of the results that may be expected for an entire year.
On April 7, 2000, the Company filed its Plan of Reorganization, which is
subject to Bankruptcy Court approval, and commenced proceedings under Chapter 11
of the Federal Bankruptcy Code. During the Chapter 11 proceedings, the Company
will meet its trade credit and operating obligations in the ordinary course and
with no disruption of physician, vendor or employee relationships (see note 2).
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission (the "SEC") for the year ended December 31, 1999.
COST OF SERVICES
Cost of services as shown on the Consolidated Statement of Operations for
the three month periods ended March 31, 2000 and 1999 consist of the following
(in thousands):
Three Months Ended
MARCH 31,
------------------
2000 1999
---- ----
Operations payroll and related........... $ 9,534 $ 9,930
Equipment maintenance expense............ 1,937 2,307
Contract radiology fees.................. 1,994 2,264
Medical supplies......................... 2,551 2,689
Facilities rent and related.............. 2,937 2,823
Other center level costs................. 6,689 7,027
------- --------
Total Diagnostic Imaging............... 25,642 27,040
Dalcon Technologies, Inc................. 210 223
------- --------
Total Company.......................... $25,852 $27,263
======= =======
6
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RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the three
months ended March 31, 2000 and 1999 were as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended
MARCH 31,
------------------
2000 1999
---- ----
Basic and diluted earnings (loss) per share information:
<S> <C> <C>
Net loss............................................................. $ (5,080) $ (1,468)
Charges related to convertible preferred stock....................... (106) (111)
--------- ---------
Net loss applicable to common stockholders........................... $ (5,186) $ (1,579)
========= =========
Weighted average number of common shares............................. 9,853 9,336
========= =========
Basic and diluted income (loss) per common share $ (0.53) $ (0.17)
======== ========
</TABLE>
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ISSUES AFFECTING
LIQUIDITY
Since September 30, 1999, the Company has failed to meet certain of the
financial covenants under its $75,000,000 of Senior Notes indebtedness. In
addition, the Company has deferred payment of the required monthly interest
payments on the Senior Note indebtedness since January 2000 and the required
monthly interest and principle payments on certain other unsecured debt since
February 2000. The deferral of these payments represent defaults under such loan
agreements. As a result of these defaults, the lenders were entitled, at their
discretion, to exercise certain remedies, including acceleration of repayment.
Furthermore, certain medical equipment and other notes, and operating and
capital leases of the Company contain provisions which allow the creditors or
lessors to accelerate their debt or terminate their leases and seek other
remedies if the Company is in default under the terms of other agreements such
as the Senior Notes.
In the event that the holders of the Senior Notes or the other creditors or
lessors elected to exercise their right to accelerate the obligations under the
Senior Notes or the other loans and leases, such acceleration would have had a
material adverse effect on the Company, its operations and its financial
condition. In addition, if such obligations were accelerated, in whole or in
part, there could be no assurance that the Company would be successful in
identifying or consummating financing necessary to satisfy the obligations which
would have become immediately due and payable. As a result of the uncertainty
related to the defaults and corresponding remedies described above, the Senior
Notes and the other loans and capital leases are shown as current liabilities on
the Company's Consolidated Balance Sheets at March 31, 2000. Accordingly, the
Company has a deficit in working capital of $78,001,000 at March 31, 2000.
Furthermore, the Company has generated net losses in each of its last three
calendar years aggregating $102,452,000. These matters raise substantial doubt
about the Company's ability to continue as a going concern.
Following negotiations with the holders of its Senior Notes to address the
uncertainties associated with the financial difficulties described above, on
March 29, 2000, the Company entered into an agreement-in-principle with the
holders of the Senior Notes providing for conversion of the full amount of their
$75,000,000 of debt into approximately 84% of the common equity of the Company.
In addition,
7
<PAGE>
under the agreement-in-principle with the holders of the Senior Notes, an
additional $5,121,000 of unsecured notes would also be converted into
approximately 6% of the common equity of the Company. On April 7, 2000, the
Company filed a Plan of Reorganization reflecting the terms of the
agreement-in-principal, and commenced proceedings under Chapter 11 of the
Federal Bankruptcy Code. The Plan of Reorganization is subject to Bankruptcy
Court approval and applies only to the parent company and none of its
operating subsidiaries. In addition, physician relationships, trade credit
and employee obligations of the Company will not be impaired. There can be no
assurance, however, that the Company will be successful in consummating the
reorganization as described above.
In addition to reaching the agreement with the holders of the Senior Notes
described above, the Company has taken various actions to improve the Company's
liquidity, including the following: (i) during the fourth quarter of 1999 and
early 2000, the Company sold or closed nine underperforming centers that had
generated aggregate pretax operating losses of $4,267,000 during 1999 and (ii)
the Company deferred certain payments to its creditors, as described above, in
anticipation of reaching an agreement with such creditors.
The financial statements do not include any further adjustments reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of this uncertainty or the consummation of the reorganization.
3. LOSS ATTRIBUTABLE TO SALE AND CLOSURE OF CENTERS AND OTHER UNUSUAL
CHARGES
During the first quarter of 2000, the Company recorded losses attributable
to the sale and closure of diagnostic imaging centers of $625,000. The loss
consists of (i) $353,000 for the net loss on the sale of diagnostic imaging
centers and (ii) $272,000 for current period charges attributable to centers
previously closed.
During the first quarters of 2000 and 1999, the Company recorded other
unusual charges of $957,000 and $280,000, respectively. The 2000 charge consists
of costs associated with preparing for and filing the Company's Plan of
Reorganization and commencing proceedings under Chapter 11 of the Federal
Bankruptcy Code. The 1999 charge consists of costs associated with the
shareholder class action lawsuit and other related litigation (the shareholder
class action lawsuit was settled during the third quarter of 1999).
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Diagnostic Imaging:
Management fee receivables (net of contractual allowances) -
Due from unaffiliated physicians (Type I revenues) $24,934 $22,604
Due from affiliated physicians (Type III revenues) 15,412 15,998
Patient and third party payor accounts receivable (Type II revenues) 25,912 26,988
------- ------
Accounts receivable before allowance for doubtful accounts 66,258 65,590
Less: Allowance for doubtful accounts (17,464) (15,413)
-------- -------
Total accounts receivable, net $48,794 $50,177
======= =======
</TABLE>
8
<PAGE>
Accounts receivable is net of contractual allowances, which represent
standard fee reductions negotiated with certain third party payors. Contractual
allowances, recorded as a reduction in deriving net service revenues, were
approximately $33,000,000 and $32,752,000 for the three months ended March 31,
2000, and 1999, respectively.
5. COMMITMENTS AND CONTINGENCIES
Between November 14, 1997 and January 9, 1998, seven class action lawsuits
were filed in the United States District Court for the District of New Jersey
against the Company and certain of the Company's directors and/or officers. The
complaints in each action asserted that the Company and the named defendants
violated Section 10(b), and that certain named defendants violated Section 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act"), alleging that the
Company omitted and/or misrepresented material information in its public
filings, including that the Company failed to disclose that it had entered into
acquisitions that were not in the best interest of the Company, that it had paid
unreasonable and unearned acquisition and financial advisory fees to related
parties, and that it concealed or failed to disclose adverse material
information about the Company.
On August 9, 1999 the District Court approved an agreement settling all
of the pending class actions in consideration primarily of (i) a payment of
$2.75 million to be provided by the Company's insurer and (ii) the issuance
of $5.25 million of convertible subordinated promissory notes (the
"Convertible Subordinated Notes"). The $5.25 million of Convertible
Subordinated Notes bear interest at the rate of 8% per annum, and mature by
their terms on the earlier of August 1, 2005 or when the Company's presently
outstanding Senior Notes are paid in full. Additionally, the Convertible
Subordinated Notes were convertible into shares of the Company's Common Stock
beginning February 15, 2000 at a price per share equal to $2.62 per share.
Notwithstanding the settlement of the class actions, there are several
lawsuits remaining against the Company brought on behalf of sellers of imaging
centers who seek damages based on the decline in value of shares of Common Stock
issued in connection with the acquisition of certain imaging centers. Regarding
these lawsuits, which are currently subject to the automatic stay protections of
Chapter 11 of the Federal Bankruptcy Code, the Company believes that it has
meritorious defenses which it intends to assert vigorously.
On November 7, 1997, William D. Farrell resigned from his position as
President and Chief Operating Officer of the Company and as Director, and Gary
I. Fields resigned from his position as Senior Vice President and General
Counsel. On the same date, Messrs. Farrell and Fields filed a Complaint in the
Superior Court of New Jersey, Law Division, Essex County, against the Company
and the members of the Company's Board of Directors, claiming retaliatory
discharge under the New Jersey Conscientious Employee Protection Act and breach
of contract. On December 17, 1997, the plaintiffs amended their complaint to add
a claim for violation of public policy. The plaintiffs allege that they were
constructively terminated as a result of their objection to certain
related-party transactions, the purported failure of the defendants to
adequately disclose the circumstances surrounding such transactions, and the
Company's public issuance of allegedly false and misleading accounts concerning
or relating to such related-party transactions. The plaintiffs seek unspecified
compensatory and punitive damages, interest and costs and reinstatement of the
plaintiffs to their positions with the Company. On April 8, 1998, the Company
filed its Answer to the Amended Complaint, and asserted a counterclaim against
Messrs. Farrell and Fields for breach of fiduciary duties. Discovery has
commenced in the case (which is currently subject to the automatic stay
provisions of Chapter 11 of the Federal Bankruptcy Code) and the Company intends
to continue to defend itself vigorously against the allegations.
9
<PAGE>
On June 2, 1998, Mr. Ronald Ash filed a complaint against the Company,
StarMed, Wesley Medical Resources, Inc., a subsidiary of the Company ("Wesley"),
and certain officers and directors of the Company in the United States District
Court for the Northern District of California. On June 24, 1997, the Company
acquired the assets of Wesley, a medical staffing company in San Francisco,
California, from Mr. Ash and another party for 45,741 shares of the Company's
Common Stock valued at $2,000,000 and contingent consideration based on the
company achieving certain financial objectives during the three year period
subsequent to the transaction. The Ash complaint, among other things, alleges
that the defendants omitted and/or misrepresented material information in the
Company's public filings and that they concealed or failed to disclose adverse
material information about the Company in connection with the sale of Wesley to
the Company by the plaintiff. The plaintiff seeks damages in the amount of $4.25
million or, alternatively, rescission of the sale of Wesley.
On October 7, 1998, upon motion by the Company, the Ash action was
transferred from the United States District Court for the Northern District of
California and consolidated with the pending securities class actions in the
United States District Court for the District of New Jersey. The Company
believes that it has meritorious defenses to the claims asserted by plaintiff
(which is currently subject to the automatic stay of the Federal Bankruptcy
Code), and intends to defend itself vigorously. On February 19, 1999, the
Company filed a motion to dismiss the Ash Complaint.
The legal proceedings described above are in their preliminary stages.
Although the Company believes it has meritorious defenses to all claims against
it, the Company is unable to predict with any certainty the ultimate outcome of
these proceedings.
In the normal course of business, the Company is subject to claims and
litigation other than those set forth above. Management believes that the
outcome of such other litigation will not have a material adverse effect on the
Company's financial position, cash flows or results of operations. Accordingly,
the Company has made no accrual for any costs associated with such litigation.
In connection with certain of the Company's 1997 acquisitions in which
the Company issued shares of its Common Stock as consideration, the Company
agreed to register such shares for resale pursuant to the federal securities
laws. In some cases, the Company agreed with the sellers in such acquisitions
to pay to the seller (in additional shares and/or cash) an amount equal to
the shortfall, if any (the "Price Protection Shortfall"), in the value of the
issued shares and the market value of such shares on the effective date of
the Company's registration statement. Based upon the closing sales price of
the Company's Common Stock on October 2, 1998 ($2.67 per share), the date on
which the Company's registration statement was declared effective, the
Company issued 590,147 shares of Common Stock and became obligated to pay
during 1999 an additional $1,658,000 with respect to all such Price
Protection Shortfall obligations. As of March 31, 2000, $405,000 of such
Price Protection Shortfall obligations remained due and payable in 2000.
6. CONVERTIBLE PREFERRED STOCK
During 1997, the Company issued 18,000 shares of Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
to RGC International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. As of March 31, 2000, 14,175 shares of the
Company's Series C Preferred Stock remain outstanding.
10
<PAGE>
Pursuant to the Preferred Stock agreements, the Company was required to use
its best efforts to include the shares of Common Stock issuable upon conversion
of the Series C Preferred Stock (the "RGC Conversion Shares") in an effective
Registration Statement not later than October 1997 or such other mutually agreed
upon date, providing for monthly penalties ("RGC Registration Penalties") in the
event that the Company failed to register the Conversion Shares prior to such
date.
As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 shares of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000) and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000. Pursuant to an agreement with RGC, entered into
as of May 1, 1998, the exercise price of certain December 1997 Warrants to
acquire 77,667 shares of Common Stock was reduced to $2.73 per share, and the
exercise price of all of the January 1998 Warrants was reduced to $2.73 per
share
In addition to the penalties described above, as a result of the Company's
failure to register the RGC Conversion Shares prior to September 15, 1998 and
the delisting of the Company's Common Stock from NASDAQ in April 1999, RGC was
entitled to demand: (i) the Company repurchase all of the outstanding
Convertible Preferred Stock and (ii) a one-time additional penalty of
$1,490,000, payable, at the option of RGC, in cash or additional shares of
Common Stock.
On March 30, 2000 RGC served notice on the Company seeking redemption of
all of the outstanding shares of Convertible Preferred Stock for an aggregate
cash payment of $17,447,000. It is expected that all of RGC's claims shall be
addressed under the terms of the Company's Plan of Reorganization.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
RECENT DEVELOPMENTS
On March 29, 2000, the Company entered into an agreement-in-principle
with the holders of the Senior Notes providing for conversion of the full
amount of their $75,000,000 of debt into approximately 84% of the common
equity of the Company. In addition, under the agreement-in-principle with the
holders of the Senior Notes, an additional $5,121,000 of unsecured notes
would also be converted into approximately 6% of the common equity of the
Company. Under this agreement-in-principle, which is subject to certain
conditions, it is contemplated that the Company's remaining equity will be
distributed among junior creditors (including plaintiffs in current lawsuits
pending against the Company), other claim holders and the Company's equity
holders (including the Company's Convertible Preferred Stock). The conversion
of Senior Notes and other distributions are to be affected through a
pre-negotiated Plan of Reorganization under Chapter 11 of the Federal
Bankruptcy Code. On April 7, 2000, the Company filed its Plan of
Reorganization, which is subject to Bankruptcy Court approval, and commenced
proceedings under Chapter 11 of the Federal Bankruptcy Code. The Plan of
Reorganization applies only to the parent company and none of its operating
subsidiaries. In addition, physician relationships, trade credit and employee
obligations of the Company will not be impaired. There can be no assurance,
however, that the Company will be successful in consummating the
reorganization as described above.
REVENUE RECOGNITION
At each of the Company's diagnostic imaging centers, all medical services
are performed exclusively by physician groups (the "Physician Group" or the
"Interpreting Physician(s)"), generally consisting of radiologists with whom the
Company has entered into independent contractor agreements. Pursuant to these
agreements, the Company has agreed to provide equipment, premises, comprehensive
management and administration, (typically including billing and collection of
receivables), and technical imaging services to the Interpreting Physician(s).
Net service revenues are reported, when earned, at their estimated net
realizable amounts from third party payors, patients and others for services
rendered at contractually established billing rates which generally are at a
discount from gross billing rates. Known and estimated differences between
contractually established billing rates and gross billing rates ("contractual
allowances") are recognized in the determination of net service revenues at the
time services are rendered. Subject to the foregoing and various state and
Federal regulations, imaging centers operated or managed by the Company
recognize revenue under one of the three following types of agreements with
Interpreting Physician(s):
Type I--Pursuant to facility service agreements with Interpreting
Physician(s) or Physician Group, the Company receives a technical fee for
each diagnostic imaging procedure performed at a center, the amount of
which is dependent upon the type of procedure performed. The fee included
in revenues is net of contractual allowances. The Company and the
Interpreting Physician(s) or Physician Group proportionally share in any
losses due to uncollectible amounts from patients and third party payors,
and the Company has established reserves for its share of the estimated
uncollectible amount.
12
<PAGE>
Type II--The Company bills patients and third party payors directly for
services provided and pays the Interpreting Physician(s) either (i) a fixed
percentage of fees collected for services performed at the center, or (ii)
a contractually fixed amount based upon the specific diagnostic imaging
procedures performed. Revenues are recorded net of contractual allowances
and the Company accrues the Interpreting Physician(s) fee as an expense on
the Consolidated Statements of Operations. The Company bears the risk of
loss due to uncollectible amounts from patients and third party payors, and
the Company has established reserves for the estimated uncollectible
amount.
Type III--Pursuant to a facility service agreement, the Company receives,
from an affiliated physician association, a fee for the use of the
premises, a fee per procedure for acting as billing and collection agent,
and a fee for administrative and technical service performed at the
centers. The affiliated physician association contracts with and pays
directly the Interpreting Physician(s). The Company's fee, net of an
allowance based upon the affiliated physician association's ability to pay
after the association has fulfilled its obligations (i.e., estimated future
net collections from patients and third party payors less Interpreting
Physician(s) fees and, in certain instances, facility lease expense),
constitutes the Company's net service revenues. Since the Company's net
service revenues are dependent upon the amount ultimately realized from
patient and third party receivables, the Company's revenue and receivables
have been reduced by an estimate of patient and third party payor
contractual allowances, as well as an estimated provision for uncollectible
amounts.
During the third quarter of 1999, the Company changed the billing structure
of 19 imaging centers from Type I and Type II into Type III centers.
Revenues derived from Medicare and Medicaid are subject to audit by such
agencies. No such audits have been initiated and the Company is not aware of any
pending audits.
The Company also recognizes revenue from the licensing and/or sale of
software and hardware comprising radiology information systems which the Company
has developed. Such revenues are recognized on an accrual basis as earned.
For the three months ended March 31, 2000, the fees received or retained by
the Company under the three types of agreements with Interpreting Physician(s)
described above, expressed as a percentage of gross billings net of contractual
allowances for the imaging services provided, range from 78% to 89% for the Type
I agreements, 77% to 91% for the Type II agreements and 77% to 89% for the Type
III agreements. These agreements generally have terms ranging from one to ten
years.
QUARTER ENDED MARCH 31, 2000 COMPARED TO THE QUARTER ENDED MARCH 31, 1999
For the quarter ended March 31, 2000, total Company net service revenues
were $38,462,000 compared to $41,888,000 for the quarter ended March 31, 1999, a
decrease of $3,425,000 or 8%. The decrease in net service revenues was due
principally to the ongoing decline in reimbursement rates of managed care
payors, the impact of the sale and closure of fourteen underperforming imaging
centers during 1999 and the first quarter 2000 and a decline in higher priced
personal injury claims business. This decrease was partially offset by an
increase in same-store gross revenues (before contractual allowances) of 3%.
13
<PAGE>
In general, healthcare providers have been experiencing gradual
reimbursement rate declines over the past two years and this is expected to
continue through 2000 due to factors such as the expansion of managed care in
the United States and budgetary pressures placed on U.S. government agencies.
The Company will attempt to mitigate the impact of any further decline in
reimbursement rates by decreasing its costs and increasing patient referral
volumes. Nevertheless, if the rate of decline in reimbursement rates were to
materially increase, or if the Company is unsuccessful in reducing its costs or
increasing its volumes over time, the Company's results could be materially and
adversely affected.
With respect to procedure volumes, management believes the domestic
diagnostic imaging industry has experienced recent growth in MR and CT
procedures of approximately 6-7% per year. Such growth is expected to continue
in the near future. However, management believes that this growth in procedures
is being largely offset in a number of the Company's markets by an increase in
capacity. This increase in capacity is the result of the opening of competing
new centers as well as the upgrade of equipment which reduces the time it takes
for procedures to be performed. If the supply of imaging centers continues to
increase, the Company's future procedure volumes and net revenues could be
materially adversely affected over time.
Management believes that in order to remain competitive in the
marketplace, it must maintain high quality, state-of-the-art medical equipment.
Accordingly, under the Company's equipment replacement program, the Company has
replaced or upgraded fourteen MRI systems and eleven CT systems in its centers
during 1999. In addition, the Company expects to replace or upgrade an
additional fifteen MRI systems and six CT systems during 2000. Over time, the
Company expects to achieve increased volumes due to this equipment replacement
program. While the Company intends to finance new diagnostic equipment via
operating leases, there can be no assurance that such financing will remain
available over the course of the planned equipment upgrade program.
Consequently, if such financing or alternate financing were to become
unavailable, the Company's future procedure volumes and net revenues could be
materially adversely affected over time.
Costs of services for the three months ended March 31, 2000 were
$25,852,000 compared to $27,263,000 for the three months ended March 31, 1999, a
decrease of $1,411,000 or 5%. This decrease was due primarily to the impact of
the sale and closure of fourteen imaging centers during 1999 and the first
quarter 2000.
Gross profit margins, which represent net service revenue less cost of
services as a percent of net service revenue, decreased for the quarter ended
March 31, 2000 to 33% from 35% for the quarter ended March 31, 1999. This was
due primarily to the impact of the decline in reimbursement rates described
above, partially offset by the impact of the sale and closure of fourteen
underperforming imaging centers during 1999 and the first quarter 2000.
The provision for uncollectible accounts receivable for the quarter ended
March 31, 2000 was $1,694,000, or 4% of related net service revenues, compared
to the first quarter 1999 provision of $2,202,000, or 5% of related net service
revenues. The Company is continuing to focus on reducing its provision for
uncollectible accounts receivable through improvements made in information
systems, reorganization of billing management and increased emphasis in
rebilling and disputing denials by the Company's payors.
Corporate general and administrative expense for the three months ended
March 31, 2000 was $3,088,000, as compared to $2,710,000 for the three months
ended March 31, 1999, an increase of 14%. This increase was primarily due to
increased headcount related to billing and collection administration and
operations training initiatives, and higher costs of employee benefits.
14
<PAGE>
Equipment lease expense for the three months ended March 31, 2000 was
$3,315,000, as compared to $2,036,000 for the three months ended March 31, 1999
due to the equipment replacement program described above.
Depreciation and amortization expense for the quarter was $4,783,000,
compared to $5,606,000 for the first quarter of 1999, or a decrease of $823,000.
The decrease was due to lower diagnostic equipment depreciation, which was
primarily the result of the Company entering into new operating leases during
1999 and the first quarter of 2000 in connection with the equipment replacement
program described above.
During the first quarter of 2000, the Company recorded losses attributable
to the sale and closure of diagnostic imaging centers of $625,000. The loss
consists of (i) $353,000 for the net loss on the sale of diagnostic imaging
centers and (ii) $272,000 for current period charges attributable to centers
previously sold or closed.
During the first quarters of 2000 and 1999, the Company recorded other
unusual charges of $957,000 and $280,000, respectively. The 2000 charge consists
of costs associated with preparing for, and filing the Company's Plan of
Reorganization and commencing of proceedings under Chapter 11 of the Federal
Bankruptcy Code. The 1999 charge consists of costs associated with the
shareholder class action lawsuit and other related litigation (the shareholder
class action lawsuit was settled during the third quarter of 1999).
The Company will incur additional unusual charges during the remainder of
2000 related to its Plan of Reorganization and proceedings under Chapter 11 of
the Federal Bankruptcy Code, and could incur additional unusual charges related
to the possible sale and closure of additional imaging centers.
Net interest expense for the three months ended March 31, 2000 was
$2,672,000 as compared to $2,805,000 for the three months ended March 31, 1999,
a decrease of $133,000. This decrease was primarily attributable to the
retirement of notes payable and capitalized lease obligations.
The Company's loss for the quarter ended March 31, 2000 was increased by
$457,000 attributable to minority interests, as compared to an increase in the
Company's loss of $324,000 for the quarter ended March 31, 1999.
The provision for income taxes for the three months ended March 31, 2000
was $100,000 as compared to $130,000 for the comparable period last year. The
provision for income taxes for the three months ended March 31, 2000 and 1999
consists entirely of estimated state income taxes. For both quarters, a benefit
for income taxes related to the Company's losses has not been recorded due to
the uncertainty regarding the realization of the full amount of the Company's
deferred tax assets.
The Company's net loss for the quarter ended March 31, 2000 was
$5,080,000 compared to $1,468,000 for the quarter ended March 31, 1999.
The net loss applicable to common stockholders (used in computing loss per
common share) in the quarters ended March 31, 2000 and 1999 includes charges of
$106,000 and $111,000, respectively, as a result of the accretion of the
Company's convertible preferred stock.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
During the three months ended March 31, 2000, the Company's primary source
of cash flow was comprised of $2,182,000 from operations, $1,310,000 from the
sale of diagnostic imaging centers and a reduction in the Company's cash
balances of $978,000. The primary use of cash was repayment of principal amount
of capital lease obligations and notes and mortgages payable totaling
$3,916,000.
During the first quarter of 1999, the Company's primary source of cash flow
was from reductions in the Company's cash balances of $9,013,000. The primary
uses of cash in the first quarter of 1999 were the repayment of debt of
$6,686,000, and operating activities which used $1,704,000 of cash. Cash flow
from operating activities during the first quarter of 1999 was adversely
impacted by an increase in accounts receivable, net of provision for doubtful
accounts, of $4,992,000, of which $3,882,000 related to the Company's diagnostic
imaging business and $1,110,000 related to Dalcon Technologies, Inc. The
increase attributable to the Company's diagnostic imaging business was due to
lower than expected cash collections in the first quarter of 1999.
FINANCIAL RESOURCES AND LIQUIDITY
On March 29, 2000, the Company entered into an agreement-in-principle
with the holders of the Senior Notes providing for conversion of the full
amount of their $75,000,000 of debt into approximately 84% of the common
equity of the Company. In addition, under the agreement-in-principle with the
holders of the Senior Notes, an additional $5,121,000 of unsecured notes
would also be converted into approximately 6% of the common equity of the
Company. Under this agreement-in-principle, which is subject to certain
conditions, it is contemplated that the Company's remaining equity will be
distributed among junior creditors (including plaintiffs in current lawsuits
pending against the Company), other claim holders and the Company's equity
holders (including the Company's Convertible Preferred Stock). The conversion
of Senior Notes and other distributions are to be affected through a
pre-negotiated Plan of Reorganization under Chapter 11 of the Federal
Bankruptcy Code. On April 7, 2000, the Company filed its Plan of
Reorganization, which is subject to Bankruptcy Court approval, and commenced
proceedings under Chapter 11 of the Federal Bankruptcy Code. The Plan of
Reorganization applies only to the parent company and none of its operating
subsidiaries. In addition, physician relationships, trade credit and employee
obligations of the Company will not be impaired. There can be no assurance,
however, that the Company will be successful in consummating the
reorganization as described above.
In addition to reaching the agreement with the holders of the Senior Notes
described above, the Company has taken various actions to improve the Company's
liquidity, including the following: (i) during the fourth quarter of 1999 and
early 2000, the Company sold or closed nine underperforming centers generating
net proceeds to the Company of $1,310,000 and eliminating operations which had
generated aggregate pretax operating losses of $4,267,000 during 1999, and (ii)
the Company deferred certain payments to its creditors, as described above, in
anticipation of reaching an agreement with such creditors.
The financial statements do not include any further adjustments reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of this uncertainty or the consummation of the reorganization.
16
<PAGE>
Prior to 1998, the Company incurred substantial debt in connection with
acquisitions of imaging centers. As of March 31, 2000, the Company's debt,
including capitalized lease obligations, totaled $112,258,000. Cash available to
the Company for general corporate use declined from $3,827,000 at December 31,
1999 to $3,573,000 as of March 31, 2000. These balances exclude cash held by
non-wholly owned affiliates as of the indicated dates, since such cash amounts
are not readily available to the Company for general corporate purposes.
However, some portion of such excluded cash is expected to be available to
satisfy that portion of the Company's year 2000 scheduled debt repayments which
are attributable to non-wholly owned affiliates.
Other than operating lease obligations to finance new diagnostic equipment,
the Company does not expect to incur significant additional debt in the near
future. Additionally, due to expected proceeds from the sale of certain centers
and due to improvements made and being made to the Company's billing and
collections systems and procedures, the Company expects average monthly cash
flows during 2000 to improve from the level achieved during 1999. Provided that
the Company is able to complete the sale of certain of its centers and its cash
collections show improvement, and assuming that the Company reaches satisfactory
resolution with the Senior Note holders and its other lenders regarding its Plan
of Reorganization, management believes that existing available cash balances
plus expected cash flow from operations will be adequate to fund the Company's
expected cash requirements for the next twelve months.
OTHER OBLIGATIONS OF THE COMPANY
In connection with certain of the Company's acquisitions, the Company has
also agreed with certain sellers that all or a portion of the consideration for
such acquisitions will be paid on a contingent basis based upon the
profitability, revenues or other financial criteria of the acquired business
during an agreed-upon measurement period following the closing of the
acquisition (usually, one to three years). The specific terms of such contingent
consideration differs for each acquisition. In connection with certain
acquisitions, the Company and the relevant sellers have agreed to a maximum
amount of contingent consideration and in other cases the parties have agreed
that any payment of such contingent consideration may be paid in cash or shares
of Common Stock, or a combination of both. Contingent consideration associated
with acquisitions is recorded as additional purchase price when resolved.
During 1997, the Company issued 18,000 shares of Series C Convertible
Preferred Stock, $1,000 stated value per share (the "Series C Preferred Stock")
to RGC International, LDC ("RGC"). Each share of the Series C Preferred Stock is
convertible into such number of shares of Common Stock as is determined by
dividing the stated value ($1,000) of each share of Series C Preferred Stock
plus 3% per annum from the closing date to the conversion date by the lesser of
(i) $62.10 or (ii) the average of the daily closing bid prices for the Common
Stock for the five (5) consecutive trading days ending five (5) trading days
prior to the date of conversion. Pursuant to the Preferred Stock agreements, the
Company was required to use its best efforts to include the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock (the "RGC
Conversion Shares") in an effective Registration Statement not later than
October 1997 or such other mutually agreed upon date and provided for monthly
penalties ("RGC Registration Penalties") in the event that the Company failed to
register the Conversion Shares prior to such date.
As a result of the Company's failure to register the RGC Conversion Shares
until October 3, 1998, the Company: (i) issued warrants to RGC to acquire (a)
272,333 shares of Common Stock at an exercise price equal to $34.86 per share
(the "December 1997 Warrants") and (b) 116,666 share of Common Stock at an
exercise price of $38.85 per share (the "January 1998 Warrants") (such warrants
having an estimated value of $3,245,000), and (ii) issued promissory notes
bearing interest at 13% per annum (the "RGC Penalty Notes") in the aggregate
principal amount of $2,451,000 due and payable, as amended, in eleven monthly
payments beginning on December 1, 1998 and ending on October 1, 1999. Pursuant
to an agreement with RGC, entered into as of May 1, 1998, the exercise price of
certain December 1998 RGC Warrants to acquire
17
<PAGE>
77,667 shares of Common Stock was reduced to $2.73 per share, and the exercise
price of all of the January 1998 RGC Warrants was reduced to $2.73 per share.
The principal amount of and interest accrued on the RGC Penalty Notes may be
converted, at the option of the Company or RGC in certain circumstances, into
additional shares of Series C Preferred Stock or Common Stock.
In addition to the penalties described above, as a result of the Company's
failure to register the RGC Conversion Shares prior to September 15, 1998 and
the delisting of the Company's Common Stock from NASDAQ in April 1999, RGC was
entitled to demand: (i) the Company repurchase all of the outstanding
Convertible Preferred Stock and (ii) a one-time additional penalty of
$1,490,000, payable, at the option of RGC, in cash or additional shares of
Common Stock.
On March 30, 2000 RGC served notice on the Company seeking redemption of
all of the outstanding shares of Convertible Preferred Stock for an aggregate
cash payment of $17,447,000. It is expected that all of RGC's claims shall be
addressed under the terms of the Company's Plan of Reorganization.
In addition to matters discussed above, the Company is subject to
litigation that may require additional future cash outlays.
COMMON STOCK
On April 22, 1999, due to the Company's failure to meet the continued
listing requirements of the Nasdaq National Market and the Nasdaq SmallCap
Market, the Company's Common Stock was delisted by Nasdaq. The Company's Common
Stock is now traded on the OTC Bulletin Board, an electronic quotation service
for NASD Market Makers. There can be no assurance that the Company's Common
Stock will continue to trade on the OTC Bulletin Board.
The Company has never declared a dividend on its Common Stock and under the
Company's Senior Note agreement, the payment of such dividends is not permitted.
SEASONALITY AND INFLATION
The Company believes that its business is only moderately affected by
seasonality. The third quarter is typically the slowest quarter of the year
because the months of July and August are the principal vacation months of the
year. The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to date to the Company's operations. Notwithstanding the
foregoing, general inflation trends and continuing reimbursement rate pressures
in the future may cause the Company not to be able to raise prices for its
diagnostic imaging procedures by an amount sufficient to offset the negative
effects of increasing costs. While the Company has responded to these concerns
in the past by attempting to increase the volume of its business, there can be
no assurance that the Company will be able to increase its volume of business in
the future. These trends, if continued over time, could have a material adverse
effect on the financial results of the Company.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that forward-looking
statements are inherently uncertain. Actual performance and results may differ
materially from that projected or suggested herein due to certain risks and
uncertainties including, without limitation: the ability of the Company to
consummate a Plan of Reorganization pursuant to its agreement with the holders
of the $75,000,000 of Senior Notes; the ability of the Company to generate net
positive cash flows from operations; the ability of the Company to obtain
financing (and any required consents and
18
<PAGE>
approvals) to fund its operations as
needed; the payment timing and ultimate collectibility of accounts receivable
from different payer groups (including personal injury type); the impact of a
changing mix of managed care and personal injury claim business on contractual
allowance provisions, net revenues and bad debt provisions; the availability of
lease financing, in general and on reasonable terms, for the replacement or
upgrade of the Company's diagnostic equipment as required to remain competitive;
and the effects of Federal and state laws and regulations on the Company's
business over time. Additional information concerning certain risks and
uncertainties that could cause actual results to differ materially from that
projected or suggested is contained in the Company's filings with the Securities
and Exchange Commission (SEC) over the last 12 months, copies of which are
available from the SEC or from the Company upon request.
19
<PAGE>
II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
--------
None
b. REPORTS ON FORM 8-K
-------------------
On April 11, 2000, the Company filed a Current Report of Form 8-K
reporting that it had filed a pre-negotiated Joint Plan of Reorganization and
commenced proceedings under Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New York.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL RESOURCES, INC.
/s/ GEOFFREY A. WHYNOT
-----------------------------------
Geoffrey A. Whynot
CO-CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ STEVEN M. VELLA
-----------------------------------
Steven M. Vella
VICE PRESIDENT-FINANCE
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 15, 2000
21
<PAGE>
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